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European indices were firmer on the open this morning, but soon began to drift back from their highs. It looks as if traders want to take their cue again from the US. But some care should be taken ahead of tomorrow’s Thanksgiving holiday as trading volumes are likely to be light today.

For a second consecutive day the Dow, S&P, NASDAQ and Russell 2000 all closed out at record highs. The buying was triggered by a strong rally in the oil price but then took on a momentum of its own as crude sold off. The US rally helped to lift European equities yesterday. Oil and energy sectors flew higher while miners topped the FTSE100.

The stock market rally has come on the back of a sharp sell-off in the bond market. In some ways this is understandable as it used to be that bonds and equities were negatively correlated. However, that hasn’t been the case since 2009 when central banks printed up trillions in currency which helped to drive up the prices of bonds, equities, property and other financial assets. The bond market is reacting to the increased likelihood of inflation taking off and rates rising accordingly. So far, equities are responding to the prospect of Trumpenomics which should prove inflationary. Nevertheless, equities also need to see a pick-up in growth and that isn’t currently in evidence.

Stock Index Update

- Probability of Dec Fed hike hits 100%

- UK Chancellor to deliver Autumn Statement

Yesterday the probability of a December Fed rate hike (according to the CME’s FedWatch Tool) hit 100% - up from 95% on Monday. So it’s fair to assume that financial markets have factored in tighter monetary conditions in the US. That certainly seems the case with the US dollar, and the bond market. However, equity investors are also convinced that US growth is also about to pick up and outstrip any inflation going forward. That may prove to be too optimistic.

UK Chancellor Philip Hammond will present his first Autumn Statement later today. Mr Hammond has already said that he isn't planning to meet his predecessor George Osborne's target for cutting the deficit. But it seems unlikely that the new Chancellor will be announcing any large spending initiatives either. Mr Hammond may announce spending on housebuilding and transport infrastructure. But he has been at pains to warn markets that he is not about to indulge in “a fiscal splurge” preferring instead “modest, rapidly deliverable investments that can have the most immediate impact, particularly on the road network, but also in some places on the rail network.”

There has been some speculation that Mr Hammond could reduce VAT, make changes to personal and corporate tax rates or scrap George Osborne’s stamp duty on second homes. But he may prefer to leave these matters until the Budget early next year.

Commodities Update

- Crude slips as problems emerge ahead of OPEC meeting

- Dollar recovery sees precious metals fall

Both WTI and Brent pulled back from their best levels yesterday. This followed reports that Iran, Iraq and Indonesia were expressing "reservations" about the proposed 4.5% OPEC production cut which, apparently, will only exempt Libya and Nigeria. The news came as a surprise as recent OPEC statements had suggested that all members were close to agreement. Not only that, but it also suggests that Iran was never included in the exemption. If so, then we could be looking at a similar situation to the production freeze meeting in Doha back in April. Back then, tensions between Saudi Arabia and Iran were such that Iran didn’t bother to attend the meeting. Meanwhile, Iraq’s Foreign Minister Ibrahim al-Jafari said his country should be allowed to continue raising output with no restrictions saying, “Iraq is in a special situation ...we are at war."

The International Energy Agency (IEA) yesterday predicted that global gasoline consumption is close to peaking thanks to increased efficiency and the advent of electric vehicles. Petrol accounts for 25% of crude oil consumption. Nevertheless, the IEA still expects oil demand to grow for several decades yet due to increased consumption of other oil products by the shipping, trucking, aviation and petrochemical industries.

Yesterday gold and silver gave back the majority of the gains they clawed back on Monday. Once again the two precious metals were at the mercy of the US dollar. The greenback has had a strong run since Donald Trump’s election victory - after investors recovered from their initial shock. However, some profit-taking crept in at the beginning of the week and this helped to lift both gold and silver. Yesterday the dollar resumed its ascent. Investors are focusing on the outlook for inflation and interest rates given Trump’s election promises. These included personal and corporate tax cuts, a tearing up of regulation in energy and banking and a raft of fiscal stimulus in the form of infrastructure spending. However, it’s worth noting that many in the Republican-led Congress are deficit hawks who won’t want to vote in favour of any unfunded spending or tax cuts as they will increase the deficit and national debt. It’s just possible that the market is getting a little ahead of itself in expecting a strong pick-up in growth or inflation.

Forex Update

- Euro struggles as concerns grow over Italian referendum

- Dollar rally resumes after mild bout of profit-taking

The US dollar flew higher yesterday and resumed the rally which began soon after Donald Trump’s election victory. The dollar has risen on expectations that inflation will pick up if Mr Trump pushes through his proposals over tax cuts and infrastructure spending. US interest rates are expected to rise in response. Yesterday the CME’s FedWatch Tool put the probability of a December Fed rate hike at 100% - up from 95% on Monday. As such it is inconceivable that the Fed will risk wrong-footing the markets by delaying any further. But there is a concern that the US central bank is set to tighten despite there being a downward trend in GDP growth.

Investors are now looking ahead to the Italian referendum on electoral reform which takes place on 4th December. Italian Prime Minister Matteo Renzi has staked his political future on the outcome saying he will resign if he loses the vote. This summer’s UK referendum result along with Donald Trump’s election victory has boosted speculation that Italians will reject the reforms. This is not ostensibly about Italy’s membership of the EU, rather reducing the size (and power) of the senate, the country’s second chamber. However, a vote against Renzi’s reforms is yet another protest vote which could have wide-ranging repercussions.

Upcoming events

Today’s key economic data releases include French, German and Euro zone Flash Manufacturing and Services PMIs. UK Chancellor of the Exchequer Philip Hammond will deliver his Autumn Statement and there is a speech from Bank of England MPC member Kristin Forbes. From the US we have Durable Goods, Weekly Jobless Claims, HPI, Flash Manufacturing PMI, New Home Sales, Consumer Sentiment, Inflation Expectations, Crude Oil Inventories and minutes from the FOMC meeting earlier this month.

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